Best bets in a low rate environment

Lower and lower is all we now know. The race to the bottom here we go.

No, I’m not talking about the equity markets. And no, I’m not talking about cheaper wages or the price of natural gas.

I’m referring to short-term interest rates and yields. Australia, Brazil, China, Europe, and the U.S. have been busy grinding their rates even lower, and now even Canada may be next in line. After years of being lectured, Carney and the BoC continue to delay increasing rates in the face of the global currency war that’s being waged.

Read: Rise above low interest rates

Meanwhile, capital market investors continue to show their insatiable appetite for anything that exudes the smell of dividends, income or yield, such as GICs, government and corporate bonds. On the equity side of the equation, dividends, distributions, and now the new junior small cap energy trust model 2.0 has investors salivating and demanding more yield.

But just how low can bond yields go?

Read: Bonds are still attractive

In my opinion, rates will stay low for some time yet. Government bond yields will continue to tread water, while corporate bond yields will go even lower. Also, dividend yields may have room to grow given payout ratios are historically low (on average, companies in the S&P are only paying out ~35% of earnings through their dividends).

So what’s an investor to do this in this abnormally low rate environment?

The income trade is alive and well. I believe investors will continue to gravitate towards income and dividend-paying investments, given the continued macro-economic uncertainty and endless risks to the global economy.

Read: Choose corporate over government bonds

As a result, the following investments merit closer attention in this low growth environment:

• High interest savings accounts/funds have interest rates that are equivalent to five to seven year government bonds. There’s no risk and Canadian Deposit Insurance Corporation (CDIC) guaranteed up to $100,000 per issuer;
• Government bonds have preservation of capital and downside protection;
• Investment grade corporate bonds have moderate yield and downside protection;
• High yield corporate bonds have higher yield but with equity-like risk profile;
• REITs have yield, inflation protection, and lower volatility;
• Blue chips a.k.a dividend growers (all sizes/capitalizations) have yield, inflation protection, capital growth, lower volatility, and a moderate risk profile;
• USD-denominated mega cap dividend stocks have yield, lower volatility, downside protection from a Canadian investors perspective (pays an insurance yield when markets sell off as the U.S. dollar rises), and moderate risk profile.

The world of investment is fraught with risk and uncertainly, like it or not. Rather than run from the bottom, embrace the race.

Read: Inflation isn’t a threat…for now

Justin G. Charbonneau, CFA, DMS, FCSI is vice president and lead portfolio manager of Global Asset Allocation, Fixed Income, & Matco’s Balanced Fund at Matco Financial Inc., based in Calgary. @iHelpInvestCFA